09 Feb Market Baskets – Pitfalls and Best Practices
Market Baskets – Pitfalls and Best Practices
Today, more than ever, there is greater pressure on organizations to do more with less in order to maintain their position in the market place. Senior living providers have always had to deal with an intense regulatory environment, declining reimbursement, census challenges, and difficulty with attracting and retaining employees. Add in Accountable Care Organizations, managed care, never before envisioned partnerships, political uncertainty, and now a pandemic, and providers are experiencing a whole new degree of risk. Expense reduction is viewed as an increasingly important strategy for ensuring organizational survival. With this in mind….it’s market baskets to the rescue!
The term market basket refers to a fixed list of items used specifically to track the progress of inflation in an economy or specific market. While the market basket has become one of the most utilized evaluation tools to justify changing vendors or measuring an organization’s purchasing effectiveness, it’s interesting just how hard it is to find any information about them on Google. Unfortunately, the market basket has become the only tool to address these important issues.
Here’s the reality: most buyers are approached by vendors offering to perform a market basket analysis so they can demonstrate just how much money can be saved by buying from them versus the current supplier. It’s critical to remember that a market basket is primarily a snapshot of a point in time reflecting your current purchases. Given today’s volatile commodity markets, the analysis may be obsolete by the time it’s delivered back to you. Although important, the market basket should only be one component of your comprehensive RFP (Request for Proposal) process and should never be relied on as the sole decision making criteria.
Don’t forget total cost of ownership! For example, today, many Americans are finding that when they buy a car, the price of that car is only part of the equation. There is a cost of ownership formula that many car websites are displaying that covers regular maintenance, fuel consumption, costs for replacement parts and repairs. The question then is why do we get hung up on price alone? Perhaps it’s because price is an easy form of evaluation or the quickest way to validate whether or not we are getting a good deal. Market basket pricing doesn’t equal cost of ownership, nor will it help you realize any savings if you don’t understand how to use it to your advantage.
Buyer Beware: the limitations of a market basket can range from simple mistakes to non-disclosed information. Do not take for granted that the analysis has been completed correctly! Mismatched items, wrong brand, grade, quality, pack size and the utilization of outdated pricing are errors that can have dire results. Had enough yet? Just wait, it gets better. Phantom pricing and removed items can help the competing supplier’s pricing look excellent, but leave you looking at an incomplete picture of reality. Phantom pricing is when the distributor does not stock an item and calls a manufacturer to get a truckload price. The special bulk price plus the distributor margin is then put into the analysis. The problem with this practice is that the distributor may never purchase in truckload pricing, so the depth of the actual discount will be drastically different than what is shown in the market basket price. Removed items can include chemicals, specialty items, seasonal items, produce, and items the distributor doesn’t carry a match for in your basket of items. Chemicals, being largely contract driven, and produce, being very time sensitive, are the two largest categories typically excluded. If you allow the removal of these items, during the final presentation make sure the distributor discloses what they offer in these categories. Unfortunately, buyers seldom audit the pricing after the decision is made to see if the expected savings were actually realized.
In light of all this, how should you structure a market basket analysis? The analysis, at a minimum, should be conducted on the top fifty percent of spend, or in the case of food, the top 100 items, evaluated over the most recent quarter. The essential criteria needed in every market basket include: product description, product pack & size, manufacturer, manufacturer identification code, brand, product grade, and in descending dollars. If the prospective supplier provides product alternatives to show savings, make sure they are exact matches and that cost-effective alternatives are listed separately so you have a snapshot of where other products are being utilized against what you are currently buying. Make sure that you receive all product details as outlined above for any listed alternates. Consider that a different supplier can affect your yields and product outcomes depending on what items are reflected in the market basket. If you have concerns about yields and product outcomes, consider a “can cutting” of selected items to validate that the products are indeed comparable.
Another often ignored but important part of the presentation of market basket results is a margin/markup schedule and how the cost of each item is defined. It’s essential that you are able to determine how this is addressed, so ask the supplier what factors are included in your final cost. If you are not going to do a full RFP (request for proposal), having a market basket completed should take about 14 to 30 days. Make sure you do your homework; ask lots of questions and set forth all decision making criteria and items to be evaluated from the beginning. It is not as simple as asking for a descending dollar report from your distributor and sending it to a prospective vendor. This process should include real time discussions about the results of the analysis and about what the market basket really means for your organization. If you are just comparing a prospective vendor to your current vendor, or if you are considering multiple options, it is critical to make sure that you are comparing “apples to apples.”
Ask the hard questions:
- Is this just a “snapshot bid,” or is the proposal supported by an underlying margin/markup schedule? A margin/markup schedule based upon the price into distribution is preferable.
- If it is a “snapshot bid,” for what period is the pricing guaranteed? Some vendors will provide very low pricing on the entire market basket, or on select items, for a short period of time in an effort to win the business.
- Are the products that are listed in the market basket an exact match? Are substitutions readily identified and are any differences noted? What ancillary services are included in the pricing? Sometimes lower pricing comes at the expense of overall service, or with higher pricing for ancillary services.
- In addition to the proposed pricing, what rebates and incentives are available to the customer? Having this information allows the customer to compare the overall value of the proposed relationship.
Here are some additional helpful hints:
- It is best to exclude fresh produce from your top spend food items. The produce category lends itself to questionable manipulation due to the fact that it can change costs rapidly in a brief time frame. Consider doing a simple 10 item produce listing to examine and focus on an exact date that is as recent as possible.
- Be prepared to perform your own “math” on market basket results received during a proposal. If there are apparent savings, do not solely rely on the calculations provided.
- As mentioned above, a descending dollar usage report will usually offer the best items to analyze, but just provide the line item information. You should not share actual dollar amounts from your current program.
- Remember, Excel works best for providing and receiving information.
Utilizing a market basket is a good first step in evaluating a potential vendor relationship. While this paper is devoted to the food category, the principles can easily be applied to other areas of spend. The key to actually finding a relationship that saves money for your organization over the long term is to dive deeper into the analysis to make sure that you will be working with a partner that is committed to a long term relationship that is beneficial to your organization and to the vendor.